A shareholder’s agreement is a contract between the company and its shareholders. It outlines the rights, obligations of the shareholders and provisions related to the management and the authorities of the company. The purpose of the agreement is to protect the interests of the shareholders; especially minority shareholders i.e the ones holding less than 50% of shares in the company.
Shareholder’s agreement generally consists of the provisions related to the shareholder’s rights with respect to the following matters:
- Appointment and Removal of Directors: Shareholder’s agreement clearly specifies the rights of the shareholders for nominating the director of the company as well as their removal. Also, the quorum of the board meeting is specified in the shareholder’s agreement. Quorum is the minimum attendance required to conduct the meeting.
- Transfer and Sale of Shares: It lays down the process for transfer of shares among the shareholders and also the sale of shares to outsiders.
- Voting Rights: The process of voting for passing the resolutions in the board meetings and other meetings of the company is also mentioned in the agreement.
- Authorised and Paid-up Capital: The agreement clearly states the authorised and paid-up capital of the company. It also lays down the policy governing the requirement of shareholders approval in case of new issue of shares by the company.
- Appointment and Removal of Auditors of the Company: It enlists the existing auditors of the company and the requirement of the shareholder’s consent for the change/removal of auditors.
- Banking Arrangements and financing the Company: It lays down the policy for shareholders approval in case of taking major bank loans or any other sources of finance.
- Confidentiality: Under this clause, shareholders are not allowed to disclose the company secrets or any confidential information related to the company to outsiders.
The shareholder’s agreement basically lays down the regulation for the overall conduct of the company and the rights of the shareholders in such conduct of the company. The agreement reduces the chances of disputes among the shareholders by clearly defining their roles and rights in the company. All the shareholders i.e both the minority and majority shareholders get benefits from this agreement.